Amazon banking its future on the cloud

By Edwin Yapp November 18, 2014

Cloud business could potentially be bigger than its retail arm in future
Profitability and competitive challenges, but AWS to do ‘what it takes’

CLOUD computing is considered the ‘new normal’ in today’s fast-changing digital world, so much so that the leading public cloud computing vendor is willing to bet all of its vast resources on it, said the head of Amazon Web Services.

Andy Jassy, senior vice president of the cloud arm of Amazon.com Inc, said cloud technology has come so far today that people can have different opinions about how fast it is being adopted – but no one debates its merits (or lack of) any longer.

“That companies of every size are deploying new apps, and that large companies are trying to figure out how to migrate as many of their apps as fast as possible to the cloud, tells us that cloud is the ‘new normal’,” he told a media briefing following his keynote address at the Amazon Web Services’ (AWS) annual 're:Invent' conference on Nov 12.

Jassy’s convictions about the cloud run so deep that he proclaimed AWS is prepared to “invest as much as it takes into the business to make it as successful,” as he believes Amazon’s cloud business could potentially be bigger than that of its e-commerce arm.

“It’s been bearing itself out in the last several years and I don’t know when this will be, but I believe very few enterprises will own their own data centres [in the future],” he argued.

“We’re at the beginning of a real titanic shift that is happening faster than we [AWS] anticipated,” he said. “And although there is still a lot to transpire over the next few years, we have done a lot of analysis on our business, and we’re prepared to invest as much as it takes to make it successful.”

Public IT cloud services spending is expected to reach US$56.6 billion in 2014, and grow to more than US$127 billion in 2018, according to IDC.

This represents a five-year compound annual growth rate (CAGR) of 22.8%, which is about six times the rate for the overall IT market. Additionally, public IT cloud services will account for more than half of worldwide software, server, and storage spending growth by 2018, the research and analyst firm said.

AWS challenges

The issue of profitability has dogged the world’s largest cloud provider for some time now. According to industry watchers, including some financial analysts, there are recent fundamental signs of trouble for AWS.

The situation is exacerbated by the fact that AWS does not reveal how much sales it rakes in or whether it’s profitable already, preferring to focus on its overall growth in percentage terms and the size of its customer base.

Various analysts have tried figuring this out and while there isn’t any scientific accuracy to this exercise, the general consensus is that AWS makes between US$4 and US$5 billion a year. However, the unknown variable is how much its expenditure is, thereby making it hard to determine if it’s profitable or not.

Besides these financial issues, rising competition from Microsoft Corp and Google Inc is another major issue AWS has to deal with.

In Gartner’s most recent Magic Quadrant (subscription required) the industry’s often-cited scorecard, AWS was rated to be the “overwhelming market share leader” in the cloud Infrastructure-as-a-Service (IaaS) segment.

“It is a thought leader; it is extraordinarily innovative, exceptionally agile, and very responsive to the market,” Gartner said in its report. “It has the richest array of IaaS features and PaaS-like (Platform-as-a-Service) capabilities, and continues to rapidly expand its service offerings.”

However, the reported noted that hot on its heels were Microsoft and Google, both of which the report noted have made some good inroads into AWS territory.

Gartner said that Microsoft, via its Azure platform, has a vision of infrastructure and platform services that are not only leading standalone offerings, but that also seamlessly extend and interoperate with on-premises Microsoft infrastructure (rooted in Hyper-V, Windows Server, Active Directory and System Centre) and applications, as well as Microsoft's Software-as-a-Service (SaaS) offerings.

Meanwhile, Google’s IaaS service, known as Google Compute Engine (GCE), has a comprehensive vision and an extensive experience with how cloud-native applications are developed and managed through the life-cycle, Gartner said.

“GCE represents little incremental cost to Google, which means it can price aggressively and emphasise the value of high performance for the money … . Over time, though, Google will differentiate itself with platform and manageability features, not prices,” Gartner said.

Answering critics
Amazon banking its future on the cloud
When asked when the company will come out of ‘investment mode,’ and whether the issue of profitability would stymie AWS’ plans to grow, Jassy (pic) said he believes that AWS has the potential to be the largest business for Amazon.com in the long term, which he claims says a lot given that its retail parent turns over US$70 billion in revenue.

“We’re extremely pleased with our business and our progress,” Jassy declared. “We believe that AWS has the potential to be the biggest business for the company, and so we will continue to invest.”

“We have a high amount of confidence that this is the right model for AWS for years to come, and we’re very confident that we can fund this business the way it deserves.”

On the issue of competition, Jassy remained philosophical, saying that while Google and Microsoft might have the financial strength to mount a challenge, he doesn’t view this as the real differentiator.

“If you look at the amount of functionality, the number of services, the number of features within those services, AWS has a lot more functionality in our platform than any other provider,” he claimed.

Jassy also pointed to the fact that it’s tough for other cloud providers to scale the way AWS does, especially given the number of services and functions they would have to mount in order to catch AWS as the leader.

“There aren’t many options [for customers] given the number of cloud providers, which have relatively nascent offerings,” he claimed.

And in a interview with tech blog Re/code, Jassy stressed he doesn't consider the lowering of its prices -- for the 45th time since 2006 -- a price war between AWS and its rivals.

"So is it a price war? I mean, I know that’s a very interesting angle for stories in the press. And I know the press has been very excited about it," he was quoted as saying. "We just don’t think of it that way because we’ve always believed that pricing is going to continue to come down."

Michael Warrilow, research director at Gartner, agreed that both Microsoft and Google have the financial and technical chops to challenge AWS, but said that both competitors are still not as good as AWS in terms of features, functionality or execution, and that it’ll be some time before they can catch up.

“Microsoft, through its Azure platform, has indeed improved significantly over the last 12 months,” he told Digital News Asia (DNA) on the sidelines of re:Invent.

“It has boosted the number of services, expanded data centre locations considerably, and will continue to do that. It also has a number of services in preview, but it would need to move them into production quicker,” he said.

As for Google, Warrilow said there is no doubt that it has the potential to get to parity with the other two by virtue of its pedigree and background.

“While Google is catching up, it is still very nascent with very few data centre locations globally, especially in Asia, but this is expected to change in the next 12 months,” he said.

“[Google] definitely has room for improvement, and it’ll push forward by being extremely competitive in pricing,” he added.

Edwin Yapp reports from re:Invent 2014 Las Vegas, at the invitation of Amazon.com. All editorials are independent.

Previous re:Invent stories:

Amazon Web Services trains its spotlight on enterprises

Amazon Web Services aims to keep ‘king of cloud’ crown